U.K. Budget Raises Growth Forecast, Proposes Tax Reforms

3/21/2012 11:42 AM ET

Britain's Chancellor of the Exchequer George Osborne has announced wide-ranging reforms to the tax system to reward work and support growth, cutting the "uncompetitive" top rate of tax from 50p to 45p, and reducing the corporate tax. The UK economy will grow more quickly this year than previously forecast, he said while presenting Budget 2012 on Wednesday.

Osborne said the Office for Budget Responsibility (OBR) has revised up its growth forecast for the U.K. economy this year to 0.8 percent from the November estimate of 0.7 percent. The economy is seen expanding faster at 2 percent next year, 2.7 percent in 2014 and 3 percent in both 2015 and 2016.

On the fiscal front, Osborne said the budget deficit is falling and forecast to reach 7.6 percent next year. "Because we've taken difficult decisions, nor do we need to tighten further," he told the parliament.

"Over the five year period, this is a fiscally neutral Budget," according to him. The Chancellor said that Britain will earn its way in the world: with far reaching tax reform.

He said that he is proposing a tax system that is more competitive for business than any other major economy in the world, and a tax system where millions of the lowest paid are lifted out of tax altogether, while the tax revenues we get from the wealthiest increase.

He announced a reduction in the corporate tax by one percent to 24 percent, starting next month. The rate is set to be reduced to 22 percent by 2014.

The bank levy rate will be raised to 0.105 percent from next January. This is expected to bring in GBP 2.5 billion revenue.

The alcohol duty was left unchanged, while duty on tobacco products was raised. A new stamp duty rate of 7 percent was also introduced on properties worth more than GBP 2 million.

Personal allowance, which is the amount people can earn tax free, was raised by GBP 1,100 to GBP 9,205.

Osborne said that at a time Italy, the Netherlands, Belgium and others are in recession, and Germany's economy shrank in the last quarter, the Office for Budget Responsibility expects the British economy "to avoid a technical recession with positive growth in the first quarter" of this year.

"The situation in the euro area remains a major risk to our forecast," Osborne said citing the OBR. The agency also identified a further spike in oil prices as another risk for the outlook.

The OBR expects unemployment to peak at 8.7 percent this year, before dropping each year to 6.3 percent by the end of the forecast period. The economy is also expected to add one million more jobs over five years.

Inflation is seen falling to 1.9 percent next year from 2.8 percent this year. Thereafter it is seen edging up to 2 percent by the end of the forecast period.

The Chancellor lowered this year's borrowing estimate to GBP 126 billion, down GBP 1 billion from the earlier prediction. He attributed lower borrowing costs to the confidence investors have in the country's ability to "pay its way".

Osborn said that having taken difficult decisions to deal with Britain's record debts, this can also be a reforming Budget that seeks to repair the disastrous model of economic growth that created those debts. He claimed that action the Government took since the June Budget 2010 has restored and maintained stability and kept interest rates near record lows.

More help for the armed forces was announced. The government scrapped plans for a third runway at Heathrow airport.

The Chancellor said he wanted the UK to become Europe's technology center and announced plans to help keep video games and the animation industry in the UK.